OMERS shifts to direct investing privately

As OMERS moves towards its target asset allocation of 53:47 in public/private markets, the private equity division is also undergoing change with a preference for direct investing. Paul Renaud (pictured), president and chief executive of OMERS Private Equity, discusses the transformation.

In the past seven years the target asset allocation of the $53 billion Canadian fund, OMERS, has seen a dramatic shift towards private markets. In 2004 the target asset allocation was 82:18 in favour of public markets, and now that target ratio sits at 53:47.

The actual portfolio is around 60:40 public/private, so there is still some way to go to achieve the anticipated balance. But the idea remains that a shift away from the volatility of public markets, and towards the more stable, better returns and more even cashflow of the private markets, will benefit the fund.

Within the private markets allocation sits OMERS Private Equity, Oxford Properties Group, and Borealis Infrastructure, which together make up the 47 per cent allocation to private markets.

President and chief executive of OMERS Private Equity, Paul Renaud, says at one time each of the three asset buckets had targets, but now management has the flexibility to respond to investment opportunities. Of the current 40 per cent invested in private markets, private equity makes up just under 12 per cent (infrastructure is around 16 and real estate 13 per cent).

The fund’s private equity investment strategy has been undergoing an interesting transition in the past two and a half years, with the focus now very firmly on direct investments.

“In 2004/05 we had about 20 per cent direct and 80 per cent invested in private equity firms. That is about 45 per cent active now and 55 per cent passive,” Renaud says.

There has also been a decision not to make any further passive investments beyond the remaining $3 billion that sits with private equity firms.

“That investment period is soon coming to an end, but it is still out of our control, when a private equity firm makes an exit, we’ll get the money,” he says.

Instead of investing through funds, OMERS recently has preferred to make direct majority ownership investments, and to that end has been in competition with private equity firms.

Renaud says one advantage of the pension fund is that it has no fixed-fund terms, giving it more flexibility.

But just because the fund is competing for assets this does not mean it does not have a good relationship with those private equity firms, and testament to that is a commitment to co-investment if the opportunity is right.

OMERS has co-invested on the infrastructure side of the business, as the deals tend to be larger, and is open to it in private equity.

But overwhelmingly, the fund is focused on majority ownership with Renaud highlighting the fund has eight portfolio companies where it is majority owner and a further 10 or 12 where it has sufficient capital to influence the company.

“We are less likely to invest in a company where we have 20 per cent, as we are less likely to influence the company,” he says.

With that in mind, in the past couple of years OMERS has focused on building a team with the right makeup, as well as expansion into New York and London.

“If you’re doing it yourself, you have to build the team to provide the opportunity. We’re well placed here,” Renuad says. “It is important as we build the team to find the individual that fits our DNA but can lead in that market.”

There is also a compensation model that is consistent with a more corporate model of base salary and short-term and long-term incentives. It seems to be working, with the team of just over 20 now an award winner, receiving the Canadian Dealmakers Mid Market Private Equity Award with Société générale de financement du Québec for their acquisition of Logibec Groupe Informatique Ltée in July 2010.

The team is very much focused on due diligence and negotiation, and companies that have good services and management teams.

“We are not turn-around people. We are looking for good services and good management teams, not a distressed company and change management, but where is the value creation,” Renaud says.

“We do due diligence with a top accounting firm to help on finance, and a management consulting firm. A big part of our focus is how realistic are the finance assumptions and conditions the forecasts are based on,” he says.

A broad aim is to double the size of a company in five years, and the fund’s investment in Golf Town is a good example of a successful strategy.

The company had 32 stores in Canada, was listed and had some capital constraints. OMERS delisted the company, tripled the rollout of stores, knocking the competition out of the market, and moved into the US.

While the private equity team is focused on portfolio diversification, Renaud says a sector in which the fund has done a few deals and “is hard not to like” is healthcare.

“It’s a good space to be in, it’s where the demographic trends are and good organic growth,” he says.